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Interest Calculation Methods in Deposit Accounts

Last Updated: Jan 12, 2018 03:27PM CET

E● Deposit Interest Calculation

Overdraft Interest Calculation


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Deposit Interest Calculation


Overview

In Deposit Products interest is accrued daily on the account and applied at a later time. Both the balance used for accruing the interest and the date to apply it are defined by the settings explained in this article.

- What Account Balance is Used for Calculations?

Average Daily Balance

If you choose this method, Mambu will calculate the average balance that the client had in the account during day, and calculate the daily interest based on that amount.


Minimum Daily Balance 

With this method, Mambu will use the minimum balance the client had in the account during the day, and will calculate the interest on that amount.


End of Day Balance 

With this method, Mambu will use the end of day balance the client had in the account, and will calculate the interest on that amount. For this method, you can also choose a Maximum Balance to be used for Interest Calculation and if the End of Day Balance is greater than the Maximum Balance, then Mambu will calculate interest based on this value instead and will only use the End of Day Balance when it falls below the Maximum Balance. 


Example:

Day 1 (starting account balance = 0)
- No transactions.
- Average daily balance for interest calculation = 0 
- Minimum daily balance for interest calculation = 0

Day 2 (starting account balance = 0)
- 40 Deposit > Balance = 40
- 5 Withdrawal > Balance = 35
- 25 Deposit > Balance = 60
- Average daily balance for interest calculation (0+40+35+60)/4 = 33.75
- Minimum daily balance interest accrued = 0

Day 3 (starting account balance = 60)
- No transactions.
- Average daily balance for interest calculation = 60
- Minimum daily balance for interest calculation = 60

 

 

- When is the interest paid into the account?

Here you can define the date when the interest is actually posted to the client's account. 

For products with a maturity date an extra option is displayed, "on account maturity", this means that interest will be posted to the account when it reaches the maturity date.

On Fixed Dates option allows adding up to 12 fixed dates, but not the same date twice.

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Overdraft Interest Calculation

Overview

Interest on Overdraft Accounts is calculated using the below conditions:

  • Overdraft Interest Rate can only be a daily rate (refers to both Fixed and Index Interest Rates)
  • Balance used for calculating Overdraft interest is the Minimum Daily Balance (mathematical minimum; which, if the balance is negative, is the equivalent of the maximum overdrawn amount)
  • Overdraft Interest is accrued every day and applied to the account as specified on the product level in the “Interest Rate” section: “When is the Interest Paid Into the Account?”
  • Overdraft interest can't be applied manually
  • Overdraft interest cannot be reversed

Interest Rate Terms

Two interest rate terms are available for Deposit Products allowing Overdrafts: Fixed & Tiered. 

When selecting Tiered interest rate, you can select for each tier a starting and ending balance and an associated interest rate percentage. When interest is accrued on the account, Mambu will determine the interest rate from the tier that matches to the account's Minimum Balance balance at accrual moment (mathematical minimum; which, if the balance is negative, is the equivalent of the maximum overdrawn amount).

The interest rate displayed on the account will be updated based on the current account balance and will be changed every time the account balance matches another tier.

When clicking on the “Current Interest Tier”, a dialog will be displayed that shows all the tiers that are available for that account. When changing the positive interest rate tiers on the product, you can choose to update existing accounts with the current changes performed on the tiers.

 The tiers can be printed in contracts and any other product documents, placeholders being available for documents. These placeholders can be indexed with the tier number, so all the tiers defined in the product can be printed in the document.

 


Interest Rate Source


2 sources of interest rates are supported for Deposit Products allowing Overdrafts:
  1. Fixed Interest Rate - remains fixed for the entire term of the loan. Please see example at the end of this article: Example of overdraft interest calculation (Fixed Rate).
  2. Index Interest Rate - a floating interest rate, also known as a variable or adjustable rate. It is calculated as a sum of a reference (benchmark) index interest rate and a specified spread (margin). As a result, index interest rate will change together with changing reference (benchmark) index interest rate. Please see example at the end of this article: ‘Example of overdraft interest calculation (Index Rate)’.


By selecting Index Interest Rate option, you can define:
  1. Interest Spread constraints - to define constraints of spread that will be added to the reference index rate
  2. Interest Rate Review Frequency ­- how often should the overdraft interest rate be updated (reviewed)


Index Rates are managed under Administration > General Settings > Rates, where you can create and manage index rate sources as well as update the rates.


Additionally, the frequency for which the interest is reviewed is determined when creating a product. If there is a new Index Rate at the end of the indicated frequency period, the Index Interest Rate will be updated and Mambu will log an Overdraft Interest Rate Changed transaction on the account to mark that the rate was changed at that time.


Days in Year

You can choose from two different day count method for interest calculation on overdrafts:
  1. Actual/365 Fixed (365 days) is the method that calculates the interest daily by counting the actual number of days in the calendar and uses a fixed 365 year length;
  2. 30E/360 (360 days) counts the days from the calendar, but also introduces some changes on the months with 31 and 28 days.
  3. Actual 360 is the method that calculates interest daily by counting the number of days in the calendar, but uses a fixed 360 year length

Particularities in the 30E/360 method
  • if the month has 31 days, it will be considered as having 30. This implies that on the 31st of that month the number of accrued interest days will be the same as on the 30th.
  • the last day of February is treated as the 30th day of the month
  • interest will be computed with the assumption that there is 360 interest days in a year. So for instance, if a loan account has repayments paid yearly, the interest will be calculated for 360 days, instead of the actual number of days in the calendar year.

You can find sample calculator for Day Count using the 30E/360 methodology recommended by ISDA under the below link: 30E/360 Eurobond.

Example of overdraft interest calculation (Fixed Rate)

Let's assume an Overdraft account with a 10% overdraft interest rate.

Day 1:
  • Starting account balance: $0
  • At 10:00:00 a withdrawal of $100 is made, account balance is $ -100
  • At 20:00:00 a second withdrawal of $200 was made, account balance is $ -300
  • End of day balance $ -300 = Minimum daily balance
  • Overdraft interest for Day 1: $ -300 (Minimum balance from Day 1) * 10% (Overdraft daily interest rate) = $ -30
  • Total accrued interest on account: $ -30
Day 2
  • Starting account balance: $ -300
  • No transactions are posted that day
  • End of day balance $-300 = Minimum daily balance
  • End of day accrued interest on account: $ -30 (from Day 1)
  • Overdraft interest for Day 2: - 300 (Minimum balance from Day 2) * 10% (Overdraft Interest rate) = $ -30
  • Total accrued interest on account: $ -60

Example of Overdraft Interest Calculation (Index Rate)

One of the most common reference rates to use as the basis for applying floating interest rates is the London Inter-bank Offered Rate (LIBOR) - the rates at which large banks lend to each other.

We have based our example on the LIBOR index (reference) rate, reviewed daily and spread of 1%.

Day 1:
  • LIBOR Overnight on Day 1 = 0.2%
  • Overdraft daily Interest rate = 0.2% LIBOR Overnight on Day1 + 1% Spread = 1.2%
  • Starting account balance: $0
  • At 10:00:00 a withdrawal of $100 is made, account balance is $ -100
  • At 20:00:00 a second withdrawal of $200 was made, account balance is $ -300
  • End of day balance $ -300 = Minimum daily balance.
  • Overdraft interest for Day 1: $ -300 (Minimum balance from Day 1) * 1.2% (Overdraft daily Interest rate) = $ -3.6
  • Total accrued interest on account: $ -3.6
Day 2
  • LIBOR Overnight on Day 1 = 0.5%
  • Overdraft daily Interest rate = 0.5% LIBOR Overnight on Day2 + 1% Spread = 1.5%
  • Starting account balance: $ -300
  • Accrued interest on account: $ -3.6
  • No transactions are posted that day
  • End of day balance $ -300 = Minimum daily balance
  • Overdraft interest for Day 2: $ -300 (Minimum balance from Day 2) * 1.5% (Overdraft daily Interest rate) = $ -4.5 (Day2 interest accrued) 
  • Total accrued interest on account: $ -8.1 (= -3.6 -4.5)

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